M&S: Scope for surge in profits

PHILIP Green could squeeze £200m a year more profits out of Marks & Spencer if he improved its operating margins to those he earns in his Bhs and Arcadia empire.

That would lift Marks' profits back close to £1bn a year and add nearly 30% to its value.

The £200m figure comes from a comparison of Marks with Green's retail operations.

It suggests there is long-term upside to the value of Marks, though few analysts value the shares now at more than the 365 1/2p market price.

Green's operating profit margins are much higher than those at Marks. Admittedly, Marks has lower margin food sales - but it also pays less rent than Green does.

In the year to August 2003, operating margins at Arcadia were 12.8% (double the amount it achieved under new Marks boss Stuart Rose).

The figure at Bhs was 12%. Both are far above the 8.9% Marks made in 2002/3, though it did 10.1% in the year just ended.

In August 2003, Green had owned Arcadia for just ten months and he may be able to boost its margins further. Even as it is, if Marks were to match Arcadia's figures, its 200 3/4 profits would be £200m higher - before the increased buying power that owning a group with £8bn sales would bring.

Cost savings for a Marks bidder would start with its overseas buying, which is done through a chain of middlemen rather than by sourcing direct.

Another way of looking at the potential is that if Green could slice 5% off its cost of sales, he would add £250m to profits.

This would raise Marks' value by up to £3bn, yielding its new owner a hefty gain.